UK Reaction: Nov payrolls and Oct LFS - Tight labour market post-furlough, pre-omicron

The first post-furlough labour market data released today indicated that the labour market remains robust and did not see a material rise in unemployed. The more timely data from HMRC’s payrolls figures for November posted another strong rise of 257k on the month (to 29.4m) - the sharpest rise on record, up from October’s 160k. Vacancies also continued to increase to a new record of 1.2m (Sep-Nov) an increase of 434k from the pre-coronavirus pandemic January to March 2020 level. The unemployed to vacancies ratio fell back to 1.2 – this is the lowest reading on records back to 2001. Tightness appears to be broad-based across the economy with 13 of the 18 industry sectors posting record highs, down slightly from 15 out of 18 in October.

The Labour Force Survey (LFS) estimates for August to October 2021 provided the first estimates of the evolution of employment and unemployment following the end of furlough scheme. Employment rose strongly by 149k over the past three months, with the employment rate rising 0.3 percentage points to 60.7% (relative to 61.9% immediately before the pandemic ). The increase in employment was driven by a firm net flows from unemployment to employment – the unemployment rate decreased 0.4 percentage points on the quarter to 4.2%, matching consensus expectations.The rise in employment continues to be driven by a return of part-time work (+240k), likely reflecting large increases in younger workers and into accommodation and food services and retail roles. While employment remains high, low unemployment is also in part being driven by reduced availability. Inactivity rose in the latest 3-months, driven by large gains in long-term and short-term sick and those looking after family (+173k) – although all but offset by falling numbers retired and of students. However, the increase in inactivity appears to be driven by pandemic related issues and the persistence of a tight labour market will in part depend on how permanent these trends prove.

Average earnings ex bonuses growth picked up to 0.6% m/m in October 2021, while September was revised to +0.2% from 0.0%. The six-monthly average trend in average earnings growth m/m has been 0.25% - suggesting an annualized pace of 3.0%. This would be a solid, but unexceptional rate below the rate seen for most of 2018/2019. However, the latest increase in the context of other signs of tightness in the labour market is something that the MPC is likely to be watching closely.  

Today’s labour market report alone would clearly encourage the MPC to start a cautious hiking cycle from Thursday, increasing rates by 0.15% to 0.25%. The end of the furlough scheme does not appear to have reduced the pressure on an already tight labour market. Recent speeches from MPC members, including Deputy Governor Broadbent have underlined the importance of the labour market for the medium-term inflation outlook and hence monetary policy. However, the emergence of the Omicron variant casts significant uncertainty over this immediate action, both from the impact that the modest Plan B restrictions will have on the economy, and the risks if further restrictions are needed. Given the continued strength of the labour market and evidence of pay increases picking up, we still expect, on balance, the MPC to hike rates by 0.15% in December – albeit to caution that any future moves will depend on the evolution of the virus from here. However, we acknowledge the difficulty of setting policy amidst such uncertainty and accept that the MPC may simply defer this decision to February in the expectation of more information at this time.